# RH (RH) FY 2024 MD&A Verbatim Item 7 Management's Discussion and Analysis from RH's 10-K for fiscal year 2024. SEC filing source: https://www.sec.gov/Archives/edgar/data/1528849/000155837024004248/rh-20240203x10k.htm Accession: 0001558370-24-004248 Filing date: 2024-03-28 Report date: 2024-02-03 Extracted structurally from real Item 7 body heading to real Item 7A/8 boundary. Published MD&A gate trimmed front/tail over-capture. Confidence: high Company profile: /company/RH/ All MD&A years: /company/RH/mda/ Previous year: /company/RH/mda/fy2023/ (FY 2023) Next year: /company/RH/mda/fy2025/ (FY 2025) ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This management’s discussion and analysis of financial condition and results of operations (“MD&A”), contains forward-looking statements that are subject to risks and uncertainties. Refer to “Special Note Regarding Forward-Looking Statements and Market Data” and Item 1A—Risk Factors in this Annual Report for a discussion of the risks, uncertainties and assumptions associated with these statements. MD&A should be read in conjunction with our historical consolidated financial statements and related notes thereto and the other disclosures contained elsewhere in this Annual Report. The results of operations for the periods reflected herein are not necessarily indicative of results that may be expected for future periods, and our actual results may differ materially from those discussed in the forward-looking statements as a result of various factors, including but not limited to those listed in Item 1A—Risk Factors and included elsewhere in this Annual Report. The discussion of our financial condition and changes in our results of operations, liquidity and capital resources are presented in this section for fiscal 2023 and a comparison to fiscal 2022. The discussion for fiscal 2022 and fiscal 2021 has been omitted from this Annual Report but is included in Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended January 28, 2023, filed with the Securities and Exchange Commission (“SEC”) on March 29, 2023. MD&A is a supplement to our consolidated financial statements within Part II of this Annual Report and is provided to enhance an understanding of our results of operations and financial condition. Our MD&A includes these primary sections: Overview. This section provides a general description of our business, including our key value-driving strategies and an overview of certain known trends and uncertainties. Factors Affecting Our Results of Operations. This section discusses certain factors that affect our results of operations, including our strategic initiatives, our ability to source and distribute products effectively, consumer preferences and demand, overall economic trends and fluctuations in quarterly results. How We Assess the Performance of Our Business. This section discusses financial and operating measures that affect our results of operations, including net revenues and demand, gross profit and gross margin, selling general and administrative expenses, operating income and operating margin, and net income and the related non-GAAP measures, in addition to adjusted EBITDA. Basis of Presentation and Results of Operations. This section provides our consolidated statements of income and other financial and operating data, including a comparison of our results of operations in the current period as compared to the prior year’s comparative period, as well as non-GAAP measures we use for operational decision-making and as a means to evaluate period-to-period comparisons. Liquidity and Capital Resources. This section provides an overview of our sources and uses of cash and our financing arrangements, including our credit facilities and debt arrangements, in addition to the cash requirements for our business, such as our capital expenditures. Critical Accounting Policies and Estimates. This section discusses the accounting policies and estimates that involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, including the significant estimates and judgments used in the preparation of our consolidated financial statements. Overview We are a leading retailer and luxury lifestyle brand operating primarily in the home furnishings market. Our curated and fully integrated assortments are presented consistently across our sales channels, including our retail locations, websites and Sourcebooks. We offer merchandise assortments across a number of categories, including furniture, lighting, textiles, bathware, décor, outdoor and garden, and baby, child and teen furnishings. Our retail business is fully integrated across our multiple channels of distribution. We position our Galleries as showrooms for our brand, while our websites and Sourcebooks act as virtual and print extensions of our physical spaces, respectively. We operate our retail locations throughout the United States, Canada, the United Kingdom and Germany, and have an integrated RH Hospitality experience in 16 of our Design Gallery locations, which includes restaurants and wine bars. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 39"]] [[/GREPCENT_TABLE]] ​ Table of Contents We have recently undertaken substantial efforts to introduce the most prolific collection of new products in our history, with over 70 new furniture and upholstery collections across RH Interiors, RH Contemporary, RH Modern, RH Outdoor, RH Baby & Child and RH TEEN. These new collections reflect a level of design and quality inaccessible in our current market, and a value proposition that will be disruptive across multiple markets. In fiscal 2023, our investment in Sourcebooks has increased in connection with introducing these new products, which we expect to continue over the next several quarters. As of February 3, 2024, we operated the following number of locations: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b"],["\u200b","\u200b","COUNT"],["RH","\u200b","\u200b"],["Design Galleries","\u200b","31"],["Legacy Galleries","\u200b","35"],["Modern Gallery","\u200b","1"],["Baby & Child and TEEN Galleries","\u200b","3"],["Total Galleries","\u200b","70"],["Outlets","\u200b","42"],["Guesthouse","\u200b","1"],["Waterworks Showrooms","\u200b","14"]] [[/GREPCENT_TABLE]] ​ For more information on our Company and operations, refer to Item 1—Business. Business Conditions While we experienced increased demand for our products during the pandemic, recently there have been significant shifts in consumer spending away from home furnishings. Our business has also been negatively affected by macroeconomic conditions including higher interest rates, the slowdown in the luxury home market as well as other negative factors related to the effects of lingering higher inflation and increased costs including higher construction expenses. Our expectation is that these factors, which have contributed to the slowdown in demand in our business, will begin to moderate in the coming quarters and that we have positioned the business to take advantage of any improvements in macroeconomic factors. Our decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to macroeconomic factors. Key Value-Driving Strategies In order to achieve our long-term strategies of Product Elevation, Platform Expansion and Cash Generation as well as drive growth across our business, we are focused on the following key strategies and business initiatives: Product Elevation. We believe we have built the most comprehensive and compelling collection of luxury home furnishings under one brand in the world. Our products are presented across multiple collections, categories and channels that we control, and their desirability and exclusivity has enabled us to achieve strong revenues and margins. Our customers know our brand concepts as RH Interiors, RH Contemporary, RH Modern, RH Outdoor, RH Beach House, RH Ski House, RH Baby & Child, RH TEEN and Waterworks. Our strategy is to continue to elevate the design and quality of our product. With the recent launch of the fall RH Interiors and RH Contemporary Sourcebooks, we have begun the introduction of the most prolific collection of new products in our history, which will continue into next year. In addition, over the next few years, we plan to introduce RH Couture, RH Bespoke and RH Color. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["40 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Gallery Transformation. Our product is elevated and rendered more valuable by our architecturally inspiring Galleries. We believe our strategy to open new Design Galleries in every major market in North America will unlock the value of our vast assortment, generating an expected annual revenue opportunity for our business of $5 to $6 billion. We believe we can significantly increase our sales by transforming our real estate platform from our existing legacy retail footprint to a portfolio of Design Galleries sized to the potential of each market and the size of our assortment. In addition, we plan to incorporate hospitality into many of the new Design Galleries that we open in the future, which further elevates and renders our product and brand more valuable. We believe hospitality has created a unique new retail experience that cannot be replicated online, and that the addition of hospitality drives incremental sales of home furnishings in these Galleries. Brand Elevation. Our strategy is to move the brand beyond curating and selling product to conceptualizing and selling spaces, by building an ecosystem of Products, Places, Services and Spaces that establishes the RH brand as a global thought leader, taste and place maker. We believe our seamlessly integrated ecosystem of immersive experiences inspires customers to dream, design, dine, travel and live in a world thoughtfully curated by RH, creating an impression and connection unlike any other brand in the world. Our hospitality efforts will continue to elevate the RH brand as we extend beyond the four walls of our Galleries into RH Guesthouses, where our goal is to create a new market for travelers seeking privacy and luxury in the $200 billion North American hotel industry. We entered this industry with the opening of the RH Guesthouse New York in September 2022, and are in the process of constructing our second RH Guesthouse in Aspen. In June 2023, we opened RH England, The Gallery at the Historic Aynho Park, a 400-year-old landmark estate representing the most inspiring and immersive physical expression of the brand to date. RH England marked the beginning of our global expansion beyond North America. Additionally, we are creating bespoke experiences like RH Yountville, an integration of Food, Wine, Art & Design in the Napa Valley; RH1 & RH2, our private jets; and RH3, our luxury yacht that is available for charter in the Caribbean and Mediterranean, where the wealthy and affluent visit and vacation. These immersive experiences expose new and existing customers to our evolving authority in architecture, interior design and landscape architecture. Global Expansion. We believe that our luxury brand positioning and unique aesthetic have strong international appeal, and that pursuit of global expansion will provide RH with a substantial opportunity to build over time a projected $20 to $25 billion global brand in terms of annual revenues. Our view is that the competitive environment globally is more fragmented and primed for disruption than the North American market, and there is no direct competitor of scale that possesses the product, operational platform, and brand of RH. As such, we are actively pursuing the expansion of the RH brand globally. Our plans include launching a number of international locations in the United Kingdom and Europe, which began with the opening of RH England, The Gallery at the Historic Aynho Park, in June 2023; followed by the November 2023 openings of RH Munich, The Gallery on Sendlinger Strasse, and RH Düsseldorf, The Gallery on the Königsallee; as well as RH Brussels, The Gallery on Boulevard de Waterloo, in March 2024. We have secured a number of locations in various markets in the United Kingdom, continental Europe and Australia, including in Madrid, Paris, London, Milan and Sydney. ​ Digital Reimagination. Our strategy is to digitally reimagine the RH brand and business model both internally and externally. Internally, our multi-year effort began with the reimagination of our Center of Innovation & Product Leadership to incorporate digitally integrated visuals and decision data designed to amplify the creative process from product ideation to product presentation. Externally, our strategy comes to life digitally through The World of RH, an online portal where customers can explore and be inspired by the depth and dimension of our brand. Launched in the spring of 2022, The World of RH includes rich, immersive content with simplified navigation and search functionality, all designed to enhance the shopping experience and render our product and brand more valuable. We expect to continue to elevate the customer experience on The World of RH with further enhancements to content, navigation and search functionality. We believe an opportunity exists to create similar strategic separation online as we have with our Galleries offline, reconceptualizing what a website can and should be. Factors Affecting Our Results of Operations We have experienced significant changes in our business from fiscal 2021 through fiscal 2023, including the impact of macroeconomic factors such as the COVID-19 pandemic, substantially higher interest and mortgage rates, increased inflation and volatility in the global financial markets and the slowdown in the housing market. We believe that COVID-19 and the resulting trends in housing markets drove increased demand in our business during a substantial portion of the pandemic. However, the demand for home furnishings has decreased since the reopening of the economy after the peak of the pandemic and consumption patterns have shifted into other areas such as travel and leisure. Apart from the impact of macroeconomic factors on our business operations and on general economic conditions, below are certain factors that affect our results of operations. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 41"]] [[/GREPCENT_TABLE]] ​ Table of Contents Our Strategic Initiatives. We are in the process of implementing a number of significant business initiatives that have had, and will continue to have, an impact on our results of operations. As a result of the number of current business initiatives we are pursuing, we have experienced in the past, and may experience in the future, significant period-to-period variability in our financial performance and results of operations. While we anticipate that these initiatives will support the growth of our business, costs and timing issues associated with pursuing these initiatives can negatively affect our growth rates in the short term and may amplify fluctuations in our growth rates from quarter to quarter. Delays in the rate of opening new Galleries and pursuit of our international expansion have resulted in delays in the corresponding increase in revenues that we experience as new Design Galleries are introduced. In addition, we anticipate that our net revenues, adjusted net income and other performance metrics will remain variable as our business model continues to emphasize high growth and numerous, concurrent and evolving business initiatives. Our Ability to Source and Distribute Products Effectively. Our net revenues and gross profit are affected by our ability to purchase our merchandise in sufficient quantities at competitive prices. Our current and anticipated demand and our level of net revenues have been adversely affected in prior periods by constraints in our supply chain, including the inability of our vendors to produce sufficient quantities of some merchandise to match market demand from our customers, leading to higher levels of customer back orders and lost sales. For example, a number of our vendors experienced delays in production and shipment of merchandise orders related to direct and indirect effects of the COVID-19 pandemic, as well as other geopolitical conflicts that have occurred in recent years. In addition, as we introduce new products and expand our merchandise assortments into new categories, we expect to experience delays in the production of some new offerings, as we have had similar experiences during prior periods when we adopted substantial newness in our business. During fiscal 2021, the lag in manufacturing and inventory receipts related to the COVID-19 pandemic, together with dislocations in our supply chain, resulted in some delays in our ability to convert demand into revenues. During the first half of fiscal 2022 we experienced increased net revenues due to fulfillment of orders generated in prior quarters as elements of our supply chain continued to catch up with customer demand. However, throughout fiscal 2023 we experienced softening demand trends as compared to fiscal 2022. While we believe the majority of the supply chain dislocation has now been resolved, there can be no assurance as to the exact course that our supply chain will take and a number of factors could contribute to further complications in our supply chain, including increased in raw material costs related to inflation and other macroeconomic factors, including negative effects in countries where our vendors produce merchandise. Based on total dollar volume of purchases for fiscal 2023, 66% of our products were sourced from Asia, including 30% from Vietnam and 22% from China and the remainder predominantly from India and Indonesia, as well as 14% from the United States and the remainder from other countries and regions. Consumer Preferences and Demand. Our ability to maintain our appeal to existing customers and attract new customers depends on our ability to originate, develop and offer a compelling product assortment responsive to customer preferences and design trends. We have successfully introduced a large number of new products in past and current periods, which we believe has been a contributing factor in our sales growth and results of operations. If we misjudge the market for our products or the product lines that we acquire, we may be faced with excess inventories for some products and may be required to become more promotional in our selling activities, which would impact our net revenues and gross profit. Overall Economic Trends. The industry in which we operate is cyclical, and consequently our net revenues are affected by general economic conditions, including conditions that affect the housing market. For example, substantially higher interest and mortgage rates and higher cost of consumer credit may reduce demand for our products. We have determined that our customer purchasing patterns are influenced by economic factors, including the health and volatility of the stock market. We have seen that previous declines in the stock market and periods of high volatility have correlated with a reduction in consumer demand for our products and may continue in future periods. We target consumers of high-end home furnishings. As a result, we believe that our sales are sensitive to a number of macroeconomic factors that influence consumer spending generally, but that our sales are particularly affected by the health of the higher-end customer and demand levels from that customer demographic. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["42 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents While the overall home furnishings market may be influenced by factors such as employment levels, interest rates, demographics of new household formation and the affordability of homes for first-time home buyers, the higher-end of the housing market may be disproportionately influenced by other factors, including stock market prices, disruption in financial markets, the number of second and third homes being bought and sold, the number of foreign buyers in higher-end real estate markets in the U.S., foreign currency volatility, inflation, tax policies and interest rates, and the perceived prospect for capital appreciation in higher-end real estate. Shifts in consumption patterns may also have an impact on consumer spending in the high-end housing market. We have in the past experienced volatility in our sales trends related to many of these factors and believe our sales may be impacted by these economic factors in future periods. We expect the impact of such macroeconomic factors on our business may continue in future quarters. For more information, refer to Item 1A—Risk Factors—Changes in consumer spending and factors that influence spending of the specific categories of consumers that purchase from us may significantly impact our revenue and results of operations. Fluctuation in Quarterly Results. Our quarterly results vary depending upon a variety of factors, including changes in our product offerings and the introduction of new merchandise assortments and categories, changes in retail locations, the timing of Sourcebook releases, and the extent of our realization of the costs and benefits of our numerous strategic initiatives, among other things. As a result of these factors, our working capital requirements and demands may fluctuate during the year. Unique factors in any given quarter may affect period-to-period comparisons, and the results for any quarter are not necessarily indicative of the results that we may achieve for a full fiscal year. How We Assess the Performance of Our Business In assessing the performance of our business, we consider a variety of financial and operating measures that affect our results of operations, including: Net Revenues and Demand. Net revenues reflect our sale of merchandise plus shipping and handling revenue collected from our customers, less returns and discounts. Revenues are recognized when a customer obtains control of the merchandise. We collect annual membership fees related to the RH Members Program, which are recorded as deferred revenue when collected from customers and recognized as revenue based on expected product revenues over the annual membership period. We also track “demand” in our business, which is a non-GAAP metric linked to the level of customer orders. Demand is an operating metric that we use in reference to the dollar value of orders placed (orders convert to net revenue upon a customer obtaining control of the merchandise) and excludes exchanges and shipping fees. Gross Profit and Gross Margin. Gross profit is equal to our net revenues less cost of goods sold. Gross profit as a percentage of our net revenues is referred to as gross margin. Cost of goods sold includes the direct cost of purchased merchandise; inventory shrinkage, inventory reserves and write-downs and lower of cost or net realizable value reserves; inbound freight; all freight costs to get merchandise to our retail locations and outlets; design, buying and allocation costs; occupancy costs related to retail and outlet operations and our supply chain, such as rent and common area maintenance for our leases; depreciation and amortization of leasehold improvements, equipment and other assets in our retail locations, outlets and distribution centers. In addition, cost of goods sold includes all logistics costs associated with shipping product to our customers, which are partially offset by shipping income collected from customers (recorded in net revenues on the consolidated statements of income). Our gross profit and gross margin can be favorably impacted by sales volume increases, as occupancy and certain other costs that are largely fixed do not necessarily increase proportionally with sales volume increases. Changes in the mix of our products may also impact our gross profit and gross margin. We review our inventory levels on an ongoing basis in order to identify slow-moving merchandise and use product markdowns and our outlets to efficiently sell these products. The timing and extent of markdowns are driven primarily by customer acceptance of our merchandise. The primary drivers of our product cost of individual goods are raw materials costs, which fluctuate based on a number of factors beyond our control, including commodity prices, changes in supply and demand, general economic conditions, competition, import duties, tariffs and government regulation and labor costs in the countries where we source our merchandise. In addition, our gross profit is also impacted by logistics costs, which may increase in the event of, for example, expansions of or interruptions in the operation of our distribution centers, furniture home delivery centers and customer service center or damage or interruption to our information systems. We place orders with merchandise vendors primarily in United States dollars and, as a result, are not currently exposed to significant foreign currency exchange risk. However, our exposure may increase in connection with our global expansion strategy as we expect to have more operations related to currencies other than the United States dollar. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 43"]] [[/GREPCENT_TABLE]] ​ Table of Contents Our gross profit and gross margin may not be comparable to other specialty retailers, as some companies may not include all or a portion of the costs related to their distribution network and store occupancy in calculating gross profit and gross margin as we and many other retailers do, but instead may include them in selling, general and administrative expenses. In addition, certain of our retail leases are accounted for as finance leases, which result in our recording a portion of the expense related to these agreements in interest expense—net on the consolidated statements of income. In recent periods we have experienced higher cost of goods sold primarily related to our increased costs of merchandise and inbound freight. Our strategy is to address cost factors as they occur, where possible, including through strategic pricing and efficiency in our operations. Selling, General and Administrative Expenses. Selling, general and administrative expenses include all operating costs not included in cost of goods sold. These expenses include payroll and payroll-related expenses, retail related expenses other than occupancy, and expenses related to the operations at our corporate headquarters, including rent, utilities, depreciation and amortization, credit card fees and marketing expense, which primarily includes Sourcebook production, mailing and print advertising costs. All retail pre-opening costs are included in selling, general and administrative expenses and are expensed as incurred. We expect certain of these expenses to continue to increase as we open new retail locations and outlets, develop new product categories and otherwise pursue our current business initiatives. Additionally, our selling, general and administrative expenses as a percentage of net revenues can be impacted by the timing of our Sourcebook distributions. Selling, general and administrative expenses as a percentage of net revenues are usually higher in lower-volume quarters and lower in higher-volume quarters because a significant portion of the costs are relatively fixed. In addition, in recent periods we have experienced increased selling, general and administrative expenses, including non-cash compensation expense, legal settlements, reorganizations, asset impairments, product recalls, employer payroll taxes on CEO option exercises, professional fees associated with debt transactions and compensation settlement arrangements, as discussed in “Basis of Presentation and Results of Operations” below. Non-GAAP Financial Measures. To supplement our consolidated financial statements, which are prepared and presented in accordance with accounting principles generally accepted in the United States (“GAAP”), we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures (collectively, “non-GAAP financial measures”). We believe that adjusted operating income, adjusted net income and adjusted EBITDA are useful measures of operating performance, as the adjustments eliminate non-recurring and other items that are not reflective of underlying business performance, facilitate a comparison of our operating performance on a consistent basis from period-to-period and provide for a more complete understanding of factors and trends affecting our business. We also use these adjusted measures as methods for planning and forecasting overall expected performance and for evaluating on a quarterly and annual basis our actual results against such expectations. We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense (benefit). Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance. We define adjusted capital expenditures as capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received. Refer to “Non-GAAP Financial Measures” below for further information. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["44 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Basis of Presentation and Results of Operations The following table sets forth our consolidated statements of income: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","\u200b","FEBRUARY 3,","% OF NET","JANUARY 28,","% OF NET","\u200b","JANUARY 29,","% OF NET","\u200b"],["\u200b","\u200b","\u200b","2024","REVENUES","2023","REVENUES","\u200b","2022","REVENUE","\u200b"],["\u200b","\u200b","\u200b","(dollars in thousands)"],["Net revenues","\u200b","\u200b","$","3,029,126","100.0","%","$","3,590,477","100.0","%","\u200b","$","3,758,820","100.0","%","\u200b"],["Cost of goods sold","\u200b","\u200b","","1,640,107","54.1","\u200b","","1,778,492","49.5","\u200b","\u200b","","1,903,409","50.6","\u200b","\u200b"],["Gross profit","\u200b","\u200b","","1,389,019","45.9","\u200b","","1,811,985","50.5","\u200b","\u200b","","1,855,411","49.4","\u200b","\u200b"],["Selling, general and administrative expenses","\u200b","\u200b","","1,022,948","33.8","\u200b","","1,089,828","30.4","\u200b","\u200b","","928,230","24.7","\u200b","\u200b"],["Income from operations","\u200b","\u200b","","366,071","12.1","\u200b","","722,157","20.1","\u200b","\u200b","","927,181","24.7","\u200b","\u200b"],["Other expenses","\u200b","\u200b","","","\u200b","\u200b","","","\u200b","\u200b","\u200b","","","\u200b","\u200b","\u200b"],["Interest expense\u2014net","\u200b","\u200b","","198,296","6.6","\u200b","","113,210","3.2","\u200b","\u200b","","64,947","1.7","\u200b","\u200b"],["Loss on extinguishment of debt","\u200b","\u200b","","\u2014","\u2014","\u200b","","169,578","4.7","\u200b","\u200b","","29,138","0.8","\u200b","\u200b"],["Other expense\u2014net","\u200b","\u200b","\u200b","1,078","\u2014","\u200b","\u200b","30","\u2014","\u200b","\u200b","\u200b","2,778","0.1","\u200b","\u200b"],["Total other expenses","\u200b","\u200b","","199,374","6.6","\u200b","","282,818","7.9","\u200b","\u200b","","96,863","2.6","\u200b","\u200b"],["Income before taxes and equity method investments","\u200b","\u200b","","166,697","5.5","\u200b","","439,339","12.2","\u200b","\u200b","","830,318","22.1","\u200b","\u200b"],["Income tax expense (benefit)","\u200b","\u200b","","28,261","0.9","\u200b","","(91,358)","(2.6)","\u200b","\u200b","","133,558","3.6","\u200b","\u200b"],["Income before equity method investments","\u200b","\u200b","\u200b","138,436","4.6","\u200b","\u200b","530,697","14.8","\u200b","\u200b","\u200b","696,760","18.5","\u200b","\u200b"],["Share of equity method investments loss","\u200b","\u200b","\u200b","10,875","0.4","\u200b","\u200b","2,055","0.1","\u200b","\u200b","\u200b","8,214","0.2","\u200b","\u200b"],["Net income","\u200b","\u200b","$","127,561","4.2","%","$","528,642","14.7","%","\u200b","$","688,546","18.3","%","\u200b"]] [[/GREPCENT_TABLE]] ​ ​ ​ ​ ​ ​ ​ ​ ​ ​ Non-GAAP Financial Measures To supplement our consolidated financial statements, which are prepared and presented in accordance with GAAP, we use non-GAAP financial measures, including adjusted operating income, adjusted net income, EBITDA, adjusted EBITDA, and adjusted capital expenditures. We compute these measures by adjusting the applicable GAAP measures to remove the impact of certain recurring and non-recurring charges and gains and the tax effect of these adjustments. The presentation of this financial information is not intended to be considered in isolation or as a substitute for, or superior to, the financial information prepared and presented in accordance with GAAP. We use these non-GAAP financial measures for financial and operational decision-making and as a means to evaluate period-to-period comparisons. We believe that they provide useful information about operating results, enhance the overall understanding of past financial performance and future prospects, and allow for greater transparency with respect to key metrics used by senior leadership in its financial and operational decision-making. The non-GAAP financial measures used by us in this Annual Report may be different from the non-GAAP financial measures, including similarly titled measures, used by other companies. For more information on the non-GAAP financial measures, please see the reconciliation of GAAP to non-GAAP financial measures tables outlined below. These accompanying tables include details on the GAAP financial measures that are most directly comparable to non-GAAP financial measures and the related reconciliations between these financial measures. ​ Adjusted Operating Income. Adjusted operating income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted operating income as consolidated operating income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. ​ ​ ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 45"]] [[/GREPCENT_TABLE]] ​ Table of Contents Reconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","","FEBRUARY 3,","","JANUARY 28,","\u200b","JANUARY 29,"],["\u200b","\u200b","2024","\u200b","2023","\u200b","2022"],["\u200b","\u200b","(in thousands)"],["Net income","\u200b","$","127,561","\u200b","$","528,642","\u200b","$","688,546"],["Interest expense\u2014net(1)","\u200b","\u200b","198,296","\u200b","\u200b","113,210","\u200b","","64,947"],["Loss on extinguishment of debt(1)","\u200b","\u200b","\u2014","\u200b","\u200b","169,578","\u200b","","29,138"],["Other expense\u2014net(1)","\u200b","\u200b","1,078","\u200b","\u200b","30","\u200b","","2,778"],["Income tax expense (benefit)(1)","\u200b","\u200b","28,261","\u200b","\u200b","(91,358)","\u200b","","133,558"],["Share of equity method investments loss(1)","\u200b","\u200b","10,875","\u200b","\u200b","2,055","\u200b","\u200b","8,214"],["Operating income","\u200b","\u200b","366,071","\u200b","\u200b","722,157","\u200b","","927,181"],["Non-cash compensation(2)","\u200b","\u200b","9,640","\u200b","\u200b","18,072","\u200b","\u200b","23,428"],["Legal settlements(3)","\u200b","\u200b","8,500","\u200b","\u200b","(4,188)","\u200b","","\u2014"],["Reorganization related costs(4)","\u200b","\u200b","7,621","\u200b","\u200b","\u2014","\u200b","","449"],["Asset impairments(5)","\u200b","\u200b","3,531","\u200b","\u200b","24,186","\u200b","","9,630"],["Recall accrual(6)","\u200b","\u200b","(1,576)","\u200b","\u200b","560","\u200b","","1,940"],["Employer payroll taxes on option exercises(7)","\u200b","\u200b","\u2014","\u200b","\u200b","14,392","\u200b","\u200b","\u2014"],["Professional fees(8)","\u200b","\u200b","\u2014","\u200b","\u200b","7,469","\u200b","","\u2014"],["Non-cash compensation related to consolidated VIEs(9)","\u200b","\u200b","\u2014","\u200b","\u200b","4,470","\u200b","\u200b","\u2014"],["Compensation settlements(10)","\u200b","\u200b","\u2014","\u200b","\u200b","3,483","\u200b","\u200b","\u2014"],["Gain on sale of building and land(11)","\u200b","\u200b","\u2014","\u200b","\u200b","(775)","\u200b","","\u2014"],["Adjusted operating income","\u200b","$","393,787","\u200b","$","789,826","\u200b","$","962,628"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Refer to discussion \u201cFiscal 2023 Compared to Fiscal 2022\u201d below for a discussion of our results of operations for the year ended February 3, 2024 and January 28, 2023. Information on the year ended January 29, 2022 (fiscal 2021) is included in Item 7\u2014Management\u2019s Discussion and Analysis of Financial Condition and Results of Operations on our Form 10-K for the fiscal year ended January 28, 2023, filed with the SEC on March 29, 2023."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Represents the amortization of the non-cash compensation charge related to an option grant made to Mr. Friedman in October 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","The adjustment in fiscal 2023 represents certain legal settlements associated with class action litigation matters. Refer to Note 19\u2014Commitments and Contingencies in our consolidated financial statements. The adjustment in fiscal 2022 represents a favorable legal settlement associated with a lease agreement."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","Represents severance costs and related payroll taxes associated with reorganizations."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(5)","The adjustment to selling, general and administrative expenses in fiscal 2023 includes impairment of property and equipment of $2.2 million related to the interior refresh of our Design Galleries, as well as impairment of a loan receivable of $1.3 million. The adjustment in fiscal 2022 represents inventory impairment of $11 million to cost of goods sold and asset impairment of $12 million to selling, general and administrative expenses related to property and equipment of Galleries under construction, as well as lease impairment of $1.0 million due to the early exit of a leased facility to selling, general and administrative expenses. The adjustment to selling, general and administrative expenses in fiscal 2021 represents asset impairments of $9.6 million."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(6)","Represents adjustments to net revenues associated with product recalls, as well as accrual adjustments, and vendor and insurance claims. In fiscal 2023, the recall adjustment decreased selling, general and administrative expenses by $1.6 million due to accrual adjustments. In fiscal 2022, the recall adjustments increased selling, general and administrative expenses by $0.6 million. In fiscal 2021, the recall adjustments increased net revenues by $1.2 million and increased selling, general and administrative expenses by $3.1 million."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(7)","Represents employer payroll tax expense related to the option exercises by Mr. Friedman in fiscal 2022."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(8)","Represents professional fees contingent upon the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchase (refer to Note 11\u2014Convertible Senior Notes in our consolidated financial statements)."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["46 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents [[GREPCENT_TABLE]] [["(9)","Represents non-cash compensation attributed to the noncontrolling interest holder of our consolidated real estate joint ventures in fiscal 2022 based on the fair value of the noncontrolling interests upon the closing of such joint venture transactions (refer to \u201cConsolidated Variable Interest Entities and Noncontrolling Interests\u201d within Note 3\u2014Significant Accounting Policies in our consolidated financial statements)."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(10)","Represents compensation settlements related to the Rollover Units and Profit Interest Units in the Waterworks subsidiary."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(11)","Represents gain on sale of building and land."]] [[/GREPCENT_TABLE]] ​ Adjusted Net Income. Adjusted net income is a supplemental measure of financial performance that is not required by, or presented in accordance with, GAAP. We define adjusted net income as consolidated net income, adjusted for the impact of certain non-recurring and other items that we do not consider representative of our underlying operating performance. ​ Reconciliation of GAAP Net Income to Adjusted Net Income [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","FEBRUARY 3,","\u200b","JANUARY 28,","\u200b","JANUARY 29,"],["\u200b","","2024","","2023","","2022"],["\u200b","","(in thousands)"],["Net income","\u200b","$","127,561","\u200b","$","528,642","\u200b","$","688,546"],["Adjustments pre-tax:","\u200b","","\u200b","\u200b","","\u200b","\u200b","","\u200b"],["Non-cash compensation(1)","\u200b","","9,640","\u200b","\u200b","18,072","\u200b","\u200b","23,428"],["Legal settlements(1)","\u200b","\u200b","8,500","\u200b","\u200b","(4,188)","\u200b","\u200b","\u2014"],["Reorganization related costs(1)","\u200b","","7,621","\u200b","\u200b","\u2014","\u200b","\u200b","449"],["Asset impairments(1)","\u200b","\u200b","3,531","\u200b","\u200b","24,186","\u200b","\u200b","9,630"],["Recall accrual(1)","\u200b","","(1,576)","\u200b","\u200b","560","\u200b","\u200b","1,940"],["Loss on extinguishment of debt(1)","\u200b","","\u2014","\u200b","\u200b","169,578","\u200b","\u200b","29,138"],["Employer payroll taxes on option exercises(1)","\u200b","","\u2014","\u200b","\u200b","14,392","\u200b","\u200b","\u2014"],["Professional fees(1)","\u200b","","\u2014","\u200b","\u200b","7,469","\u200b","\u200b","\u2014"],["Non-cash compensation related to consolidated VIEs(1)","\u200b","\u200b","\u2014","\u200b","\u200b","4,470","\u200b","\u200b","\u2014"],["Compensation settlements(1)","\u200b","\u200b","\u2014","\u200b","\u200b","3,483","\u200b","\u200b","\u2014"],["Gain on derivative instruments\u2014net(2)","\u200b","\u200b","\u2014","\u200b","\u200b","(1,724)","\u200b","\u200b","\u2014"],["Gain on sale of building and land(1)","\u200b","\u200b","\u2014","\u200b","\u200b","(775)","\u200b","\u200b","\u2014"],["Amortization of debt discount(3)","\u200b","\u200b","\u2014","\u200b","\u200b","\u2014","\u200b","\u200b","18,477"],["Subtotal adjusted items","\u200b","","27,716","\u200b","","235,523","\u200b","","83,062"],["Impact of income tax items(4)","\u200b","","(18,787)","\u200b","\u200b","(237,683)","\u200b","\u200b","(13,317)"],["Share of equity method investments loss(1)","\u200b","","10,875","\u200b","","2,055","\u200b","","8,214"],["Adjusted net income","\u200b","$","147,365","\u200b","$","528,537","\u200b","$","766,505"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Refer to table titled \u201cReconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income\u201d and the related footnotes for additional information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Represents net gain on derivative instruments resulting from certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchase (refer to Note 11\u2014Convertible Senior Notes in our consolidated financial statements)."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 47"]] [[/GREPCENT_TABLE]] ​ Table of Contents [[GREPCENT_TABLE]] [["(3)","Prior to the adoption of Accounting Standards Update (\u201cASU\u201d) 2020-06\u2014Accounting for Convertible Instruments and Contracts in an Entity\u2019s Own Equity (which was adopted as of the first quarter of fiscal 2022) (\u201cASU 2020-06\u201d), certain convertible debt instruments that may be settled in cash on conversion were required to be separately accounted for as liability and equity components of the instrument in a manner that reflected the issuer\u2019s non-convertible debt borrowing rate. Accordingly, in accounting for GAAP purposes through fiscal 2021 for the $335 million aggregate principal amount of convertible senior notes that were issued in June 2018 (the \u201c2023 Notes\u201d) and the $350 million aggregate principal amount of convertible senior notes that were issued in September 2019 (the \u201c2024 Notes\u201d), we separated the 2023 Notes and 2024 Notes into liability (debt) and equity (conversion option) components and we amortized as debt discount an amount equal to the fair value of the equity components as interest expense on the 2023 Notes and 2024 Notes over their expected lives. The equity components represented the difference between the proceeds from the issuance of the 2023 Notes and 2024 Notes and the fair value of the liability components of the 2023 Notes and 2024 Notes, respectively. Amounts were presented net of interest capitalized for capital projects of $10 million during fiscal 2021. No amortization of the debt discounts were recognized during fiscal 2023 or fiscal 2022, as we recombined the previously outstanding equity component of the 2023 Notes and 2024 Notes upon the adoption of ASU 2020-06."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(4)","For fiscal 2023 and fiscal 2022, we exclude the GAAP tax provision and apply a non-GAAP tax provision based upon (i) adjusted pre-tax net income, (ii) the projected annual adjusted tax rate and (iii) the exclusion of material discrete tax items that are unusual or infrequent, such as tax benefits related to the option exercises by Mr. Friedman in fiscal 2022 and the Federal Rehabilitation Tax Credit related to the San Francisco Design Gallery in fiscal 2023. The adjustments for fiscal 2023 and fiscal 2022 are based on adjusted tax rates of 24.2% and 21.7%, respectively."]] [[/GREPCENT_TABLE]] The adjustment for fiscal 2021 is based on an adjusted tax rate of 16.1%, which excludes the tax impact associated with our share of equity method investments loss. EBITDA and Adjusted EBITDA. EBITDA and Adjusted EBITDA are supplemental measures of financial performance that are not required by, or presented in accordance with, GAAP. We define EBITDA as consolidated net income before depreciation and amortization, interest expense—net and income tax expense (benefit). Adjusted EBITDA reflects further adjustments to EBITDA to eliminate the impact of non-cash compensation, as well as certain non-recurring and other items that we do not consider representative of our underlying operating performance. ​ ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["48 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Reconciliation of GAAP Net Income to EBITDA and Adjusted EBITDA [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","FEBRUARY 3,","\u200b","JANUARY 28,","\u200b","JANUARY 29,"],["\u200b","","2024","","2023","","2022"],["\u200b","\u200b","(in thousands)"],["Net income","\u200b","$","127,561","\u200b","$","528,642","\u200b","$","688,546"],["Depreciation and amortization","\u200b","","118,989","\u200b","","108,588","\u200b","","96,022"],["Interest expense\u2014net","\u200b","","198,296","\u200b","","113,210","\u200b","","64,947"],["Income tax expense (benefit)","\u200b","","28,261","\u200b","","(91,358)","\u200b","","133,558"],["EBITDA","\u200b","","473,107","\u200b","","659,082","\u200b","","983,073"],["Non-cash compensation(1)","\u200b","","39,382","\u200b","","43,544","\u200b","\u200b","48,478"],["Share of equity method investments loss(2)","\u200b","\u200b","10,875","\u200b","\u200b","2,055","\u200b","\u200b","8,214"],["Legal settlements(2)","\u200b","\u200b","8,500","\u200b","\u200b","(4,188)","\u200b","\u200b","\u2014"],["Capitalized cloud computing amortization(3)","\u200b","\u200b","8,400","\u200b","\u200b","6,566","\u200b","\u200b","3,565"],["Reorganization related costs(2)","\u200b","\u200b","7,621","\u200b","\u200b","\u2014","\u200b","\u200b","449"],["Asset impairments(2)","\u200b","","3,531","\u200b","","24,186","\u200b","\u200b","9,630"],["Other expense\u2014net(2)","\u200b","\u200b","1,078","\u200b","\u200b","30","\u200b","\u200b","2,778"],["Recall accrual(2)","\u200b","","(1,576)","\u200b","","560","\u200b","\u200b","1,940"],["Loss on extinguishment of debt(2)","\u200b","\u200b","\u2014","\u200b","\u200b","169,578","\u200b","\u200b","29,138"],["Employer payroll taxes on option exercises(2)","\u200b","\u200b","\u2014","\u200b","\u200b","14,392","\u200b","\u200b","\u2014"],["Professional fees(2)","\u200b","\u200b","\u2014","\u200b","\u200b","7,469","\u200b","\u200b","\u2014"],["Non-cash compensation related to consolidated VIEs(2)","\u200b","\u200b","\u2014","\u200b","\u200b","4,470","\u200b","\u200b","\u2014"],["Compensation settlements(2)","\u200b","\u200b","\u2014","\u200b","\u200b","3,483","\u200b","\u200b","\u2014"],["Gain on sale of building and land(2)","\u200b","\u200b","\u2014","\u200b","\u200b","(775)","\u200b","\u200b","\u2014"],["Adjusted EBITDA","\u200b","$","550,918","\u200b","$","930,452","\u200b","$","1,087,265"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Represents non-cash compensation related to equity awards granted to employees, including the amortization of the non-cash compensation charge related to an option grant made to Mr. Friedman in October 2020."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Refer to table titled \u201cReconciliation of GAAP Net Income to Operating Income and Adjusted Operating Income\u201d and the related footnotes for additional information."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(3)","Represents amortization associated with capitalized cloud computing costs."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 49"]] [[/GREPCENT_TABLE]] ​ Table of Contents Adjusted Capital Expenditures. We define adjusted capital expenditures as capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received. Reconciliation of Adjusted Capital Expenditures [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","FEBRUARY 3,","","JANUARY 28,","","JANUARY 29,"],["\u200b","\u200b","2024","","2023","","2022"],["\u200b","","(in thousands)"],["Capital expenditures","\u200b","$","269,356","\u200b","$","173,642","\u200b","$","185,383"],["Landlord assets under construction\u2014net of tenant allowances","\u200b","\u200b","25,368","\u200b","\u200b","51,369","\u200b","\u200b","68,454"],["Adjusted capital expenditures","\u200b","$","294,724","\u200b","$","225,011","\u200b","$","253,837"]] [[/GREPCENT_TABLE]] ​ In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 million and $4.7 million for fiscal 2023 and 2022, respectively, which are reflected as a reduction to principal payments under finance leases within financing activities on the consolidated statements of cash flows. ​ ​ ​ ​ ​ ​ Fiscal 2023 Compared to Fiscal 2022 The results for fiscal 2023 and fiscal 2022 included fifty-three weeks and fifty-two weeks, respectively. [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","FEBRUARY 3,","\u200b","JANUARY 28,"],["\u200b","\u200b","2024","\u200b","2023"],["\u200b","\u200b","RH SEGMENT","","WATERWORKS","\u200b","TOTAL(1)","","RH SEGMENT","","WATERWORKS","","TOTAL(1)"],["\u200b","\u200b","(in thousands)"],["Net revenues","\u200b","$","2,835,617","\u200b","$","193,509","\u200b","$","3,029,126","\u200b","$","3,398,638","\u200b","$","191,839","\u200b","$","3,590,477"],["Cost of goods sold","\u200b","","1,549,510","\u200b","","90,597","\u200b","","1,640,107","\u200b","","1,690,194","\u200b","","88,298","\u200b","","1,778,492"],["Gross profit","\u200b","\u200b","1,286,107","\u200b","\u200b","102,912","\u200b","\u200b","1,389,019","\u200b","\u200b","1,708,444","\u200b","","103,541","\u200b","","1,811,985"],["Selling, general and administrative expenses","\u200b","","944,365","\u200b","","78,583","\u200b","","1,022,948","\u200b","","1,010,893","\u200b","","78,935","\u200b","","1,089,828"],["Income from operations","\u200b","$","341,742","\u200b","$","24,329","\u200b","$","366,071","\u200b","$","697,551","\u200b","$","24,606","\u200b","$","722,157"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","The results for the Real Estate segment were immaterial in fiscal 2023 and fiscal 2022, thus, such results are presented within the RH Segment each period. Refer to Note 20\u2014Segment Reporting in our consolidated financial statements."]] [[/GREPCENT_TABLE]] Net revenues Consolidated net revenues decreased $561 million, or 15.6%, to $3,029 million in fiscal 2023 compared to $3,590 million in fiscal 2022. Fiscal 2023 includes approximately $50 million of net revenues, which represents revenue recognized in the fifty third week in the fiscal year, whereas fiscal 2022 included only fifty-two weeks of results. RH Segment net revenues RH Segment net revenues decreased $563 million, or 16.6%, to $2,836 million in fiscal 2023 compared to $3,399 million in fiscal 2022. The below discussion highlights several factors that resulted in a decrease in RH Segment net revenues, which are listed in order of magnitude. RH Segment net revenues for fiscal 2023 decreased primarily due to lower demand compared to fiscal 2022, reflecting a continuation of trends following the elevated pandemic-driven home spending and higher interest rates resulting in a challenging luxury housing market. Outlet sales were also impacted by these market conditions and decreased $15 million to $245 million in fiscal 2023 compared to $260 million in fiscal 2022. Waterworks net revenues Waterworks net revenues increased $1.7 million, or 0.9%, to $194 million in fiscal 2023 compared to $192 million in fiscal 2022. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["50 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Gross profit Consolidated gross profit decreased $423 million, or 23.3%, to $1,389 million in fiscal 2023 compared to $1,812 million in fiscal 2022. As a percentage of net revenues, gross margin decreased 460 basis points to 45.9% of net revenues in fiscal 2023 compared to 50.5% of net revenues in fiscal 2022. RH Segment gross profit for fiscal 2022 was negatively impacted by $11 million of inventory impairment. Excluding the adjustment for the inventory impairment mentioned above, consolidated gross margin would have decreased 490 basis points to 45.9% of net revenues in fiscal 2023 compared to 50.8% of net revenues in fiscal 2022. RH Segment gross profit RH Segment gross profit decreased $422 million, or 24.7%, to $1,286 million in fiscal 2023 compared to $1,708 million in fiscal 2022. As a percentage of net revenues, RH Segment gross margin decreased 490 basis points to 45.4% of net revenues in fiscal 2023 compared to 50.3% of net revenues in fiscal 2022. Excluding the adjustment for the inventory impairment mentioned above, RH Segment gross margin would have decreased 520 basis points to 45.4% of net revenues in fiscal 2023 from 50.6% of net revenues in fiscal 2022. The decrease in RH Segment gross margin was primarily attributable to a decrease in product margins in the Core business, largely driven by higher mix of, and discounts on, discontinued product collections. In addition, lower net revenues year over year resulted in deleverage in occupancy costs. Furthermore, occupancy increased year over year due to new Galleries and additional distribution centers costs in support of our continued global expansion efforts in Europe. Waterworks gross profit Waterworks gross profit decreased $0.6 million, or 0.6%, to $103 million in fiscal 2023 compared to $104 million in fiscal 2022. As a percentage of net revenues, Waterworks gross margin decreased 80 basis points to 53.2% of net revenues in fiscal 2023 compared to 54.0% of net revenues in fiscal 2022. Selling, general and administrative expenses Consolidated selling, general and administrative expenses decreased $67 million, or 6.1%, to $1,023 million in fiscal 2023 compared to $1,090 million in fiscal 2022. RH Segment selling, general and administrative expenses RH Segment selling, general and administrative expenses decreased $67 million, or 6.6%, to $944 million in fiscal 2023 compared to $1,011 million in fiscal 2022. RH Segment selling, general and administrative expenses were 33.3% and 29.7% of net revenues in fiscal 2023 and fiscal 2022, respectively. RH Segment selling, general and administrative expenses for fiscal 2023 included amortization of non-cash compensation of $9.6 million related to an option grant made to Mr. Friedman in October 2020, legal settlements of $8.5 million, severance expense and other payroll related costs associated with a reorganization of $7.6 million and asset impairments of $2.2 million and $1.3 million related to the interior refresh of our Design Galleries and a loan receivable, respectively, offset by accrual adjustments related to product recall charges of $1.6 million. RH Segment selling, general and administrative expenses for fiscal 2022 included amortization of non-cash compensation of $18 million related to a fully vested option grant made to Mr. Friedman in October 2020, $14 million of employer payroll tax expense associated with Mr. Friedman’s stock option exercises during fiscal 2022, $13 million of asset impairment, $7.5 million of professional fees that were contingent upon the completion of our debt transactions related to the 2023 Notes and 2024 Notes, $4.5 million of non-cash compensation attributed to the noncontrolling interests holder of our consolidated variable interest entities, and $0.6 million related to product recalls, partially offset by a $4.2 million legal settlement received and a $0.8 million gain on sale of building and land. RH Segment selling, general and administrative expenses would have been 32.3% and 28.2% of net revenues for fiscal 2023 and fiscal 2022, respectively, when excluding the adjustments to RH Segment selling, general and administrative expenses mentioned above. The increase in selling, general and administrative expenses as a percentage of net revenues was primarily due to lower net revenues driving deleverage in compensation and other fixed occupancy expenses, in addition to incremental advertising costs of $36 million in fiscal 2023 primarily related to the mailing of the 604-page fall RH Interiors Sourcebook and 352-page RH Contemporary Sourcebook. This was partially offset by a reduction in corporate expenses, including lower credit card and professional fees, as well as reduced preopening and travel expense associated with our Design Gallery openings. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 51"]] [[/GREPCENT_TABLE]] ​ Table of Contents Waterworks selling, general and administrative expenses Waterworks selling, general and administrative expenses decreased $0.4 million, or 0.4%, and was $79 million in both fiscal 2023 and fiscal 2022. Waterworks selling, general and administrative expenses for fiscal 2022 included $3.5 million in compensation settlements related to the Rollover Units and Profit Interest Units and a $0.2 million asset impairment. Excluding the adjustments mentioned above, Waterworks selling, general and administrative expenses would have decreased 140 basis points to 40.6% of net revenues in fiscal 2023 compared to 39.2% of net revenues in fiscal 2022. Interest expense—net Interest expense—net increased $85 million, or 75.2%, in fiscal 2023 compared in fiscal 2022, which consisted of the following in each fiscal year: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","FEBRUARY 3,","\u200b","JANUARY 28,"],["\u200b","\u200b","2024","","2023"],["\u200b","\u200b","(in thousands)"],["Term loan interest expense","\u200b","$","205,760","\u200b","$","120,387"],["Finance lease interest expense","\u200b","","33,822","\u200b","","32,051"],["Interest income","\u200b","","(39,603)","\u200b","","(38,520)"],["Capitalized interest for capital projects","\u200b","","(5,628)","\u200b","","(4,903)"],["Other interest expense","\u200b","","3,945","\u200b","","4,195"],["Total interest expense\u2014net","\u200b","$","198,296","\u200b","$","113,210"]] [[/GREPCENT_TABLE]] Loss on extinguishment of debt During fiscal 2022, we recognized a loss on extinguishment of debt of $170 million related to the repurchase of $237 million of principal value of convertible senior notes, inclusive of the acceleration of amortization of debt issuance costs of $1.3 million. The loss represents the difference between the carrying value and the fair value of the convertible senior notes upon entering into the repurchase agreements with the noteholders. Other expense—net Other expense—net was $1.1 million in fiscal 2023, which primarily represents a net loss due to unfavorable exchange rate changes affecting foreign currency denominated transactions of $2.5 million, primarily between the U.S. dollar as compared to Euro and Pound Sterling, partially offset by a foreign exchange gain of $1.4 million from the remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom. Other expense—net was $0.1 million in fiscal 2022, which primarily represents a foreign exchange loss of $2.2 million from the remeasurement of intercompany loans with subsidiaries in Switzerland and the United Kingdom, partially offset by a net gain due to favorable exchange rate changes affecting foreign currency denominated transactions of $0.4 million, primarily between the U.S. dollar as compared to Euro and Pound Sterling. In addition, we recorded a net gain on derivative instruments of $1.7 million, resulting from the completion of certain transactions related to the 2023 Notes and 2024 Notes, including bond hedge terminations and warrant and convertible senior notes repurchases. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["52 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Income tax expense (benefit) Our income tax expense (benefit) and effective tax rates were as follows: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","\u200b","FEBRUARY 3,","","JANUARY 28,"],["\u200b","","\u200b","2024","","2023"],["\u200b","\u200b","\u200b","(dollars in thousands)"],["Income tax expense (benefit)","\u200b","","$","28,261","\u200b","$","(91,358)"],["Effective tax rate","\u200b","\u200b","\u200b","18.1%","\u200b","\u200b","(20.9)%"]] [[/GREPCENT_TABLE]] The increase in our effective tax rate in fiscal 2023 compared to fiscal 2022 is primarily attributable to significantly lower net excess tax benefits from stock-based compensation in fiscal 2023 as compared to fiscal 2022. Equity method investments losses Equity method investments losses consists of our proportionate share of the losses of our equity method investments by applying the hypothetical liquidation at book value methodology, which resulted in a $11 million and $2.1 million loss in fiscal 2023 and fiscal 2022, respectively. ​ Liquidity and Capital Resources Overview Our principal sources of liquidity are cash flows generated from operations, our current balances of cash and cash equivalents, and amounts available under our ABL Credit Agreement (as defined below). In fiscal 2021, we entered into the ABL Credit Agreement, which amended and extended our asset based credit facility, and issued the Term Loan B (as defined below) in the amount of $2.0 billion pursuant to the Term Loan Credit Agreement. Additionally, in May 2022, we entered into the 2022 Incremental Amendment (as defined below), which amended the Term Loan Credit Agreement and raised an incremental $500 million of financing by means of the Term Loan B-2 (as defined below). Refer to Note 12—Credit Facilities in our consolidated financial statements. A summary of our net debt, and availability under the ABL Credit Agreement, is set forth in the following table: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","FEBRUARY 3,","\u200b","JANUARY 28,"],["\u200b","\u200b","2024","\u200b","2023"],["\u200b","\u200b","\u200b","(in thousands)"],["Asset based credit facility","\u200b","$","\u2014","\u200b","$","\u2014"],["Term loan B(1)","\u200b","\u200b","1,955,000","\u200b","\u200b","1,975,000"],["Term loan B-2(1)","\u200b","\u200b","493,750","\u200b","\u200b","498,750"],["Equipment promissory note(1)","\u200b","\u200b","\u2014","\u200b","\u200b","1,160"],["Convertible senior notes due 2023(1)","\u200b","\u200b","\u2014","\u200b","\u200b","1,696"],["Convertible senior notes due 2024(1)","\u200b","\u200b","41,904","\u200b","\u200b","41,904"],["Notes payable for share repurchases","\u200b","\u200b","315","\u200b","\u200b","\u2014"],["Total debt","\u200b","$","2,490,969","\u200b","$","2,518,510"],["Cash and cash equivalents","\u200b","\u200b","(123,688)","\u200b","\u200b","(1,508,101)"],["Total net debt(2)","\u200b","$","2,367,281","\u200b","$","1,010,409"],["Availability under the asset based credit facility\u2014net(3)","\u200b","$","447,693","\u200b","$","533,482"]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(1)","Amounts exclude discounts upon original issuance and third-party offering and debt issuance costs."]] [[/GREPCENT_TABLE]] [[GREPCENT_TABLE]] [["(2)","Net debt excludes restricted cash of $3.7 million as of January 28, 2023 and non-recourse real estate loans of $18 million as of both February 3, 2024 and January 28, 2023 related to our consolidated variable interest entities from our joint venture activities. The real estate loans are secured by the assets of such entities and the associated creditors do not have recourse against RH\u2019s general assets. Refer to Note 7\u2014Variable Interest Entities in our consolidated financial statements."]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 53"]] [[/GREPCENT_TABLE]] ​ Table of Contents [[GREPCENT_TABLE]] [["(3)","The amount available for borrowing under the revolving line of credit under the ABL Credit Agreement is presented net of $45 million and $27 million in outstanding letters of credit as of February 3, 2024 and January 28, 2023, respectively."]] [[/GREPCENT_TABLE]] General The primary cash needs of our business have historically been for merchandise inventories, payroll, rent for our retail and outlet locations, capital expenditures associated with opening new locations, updating existing locations, as well as the development of our infrastructure and information technology, and Sourcebooks. We seek out and evaluate opportunities for effectively managing and deploying capital in ways that improve working capital and support and enhance our business initiatives and strategies. During fiscal 2023, we invested $1,253 million of cash, inclusive of excise taxes paid, in the purchase of shares of our common stock pursuant to our Share Repurchase Program. We continuously evaluate our capital allocation strategy and may engage in future investments in connection with existing or new share repurchase programs (refer to “Share Repurchase Program and Share Retirement” below), which may include investments in derivatives or other equity linked instruments. We have in the past been, and continue to be, opportunistic in responding to favorable market conditions regarding both sources and uses of capital. Capital raised from debt financing arrangements has enabled us to pursue various investments, including our investments in joint ventures. We expect to continue to take an opportunistic approach regarding both sources and uses of capital in connection with our business. We believe our capital structure provides us with substantial optionality regarding capital allocation. Our near-term decisions regarding the sources and uses of capital will continue to reflect and adapt to changes in market conditions and our business, including further developments with respect to macroeconomic factors affecting business conditions, such as trends in luxury housing, increases in interest rates, equity market performance and inflation. We believe our existing cash balances and operating cash flows, in conjunction with available financing arrangements, will be sufficient to repay our debt obligations as they become due, meet working capital requirements and fulfill other capital needs for more than the next 12 months. While we do not anticipate that we will require additional debt to fund our operations, our goal continues to be in a position to take advantage of the many opportunities that we identify in connection with our business and operations. We have pursued in the past, and may pursue in the future, additional strategies to generate capital to pursue opportunities and investments, including through the strategic sale of existing assets, utilization of our credit facilities, entry into various credit agreements and other new debt financing arrangements that present attractive terms. We expect to continue to use additional sources of debt financing in future periods as a source of additional capital to fund our various investments. To the extent we choose to secure additional sources of liquidity through incremental debt financing, there can be no assurances that we will be able to raise such financing on favorable terms, if at all, or that future financing requirements will not require us to raise money through an equity financing or by other means that could be dilutive to holders of our capital stock. Any adverse developments in the U.S. or global credit markets could affect our ability to manage our debt obligations and our ability to access future debt. In addition, agreements governing existing or new debt facilities may restrict our ability to operate our business in the manner we currently expect or to make required payments with respect to existing commitments, including the repayment of the principal amount of our convertible senior notes in cash, whether upon stated maturity, early conversion or otherwise of such convertible senior notes. To the extent we need to seek waivers from any provider of debt financing, or we fail to observe the covenants or other requirements of existing or new debt facilities, any such event could have an impact on our other commitments and obligations, including triggering cross defaults or other consequences with respect to other indebtedness. Our current level of indebtedness, and any additional indebtedness that we may incur, exposes us to certain risks with regards to interest rate increases and fluctuations. Our ability to make interest payments or to refinance any of our indebtedness to manage such interest rates may be limited or negatively affected by credit market conditions, macroeconomic trends and other risks. Credit Facilities and Debt Arrangements We amended and restated our asset based credit facility in July 2021, which has an initial availability of up to $600 million, of which $10 million is available to Restoration Hardware Canada, Inc., and includes a $300 million accordion feature under which the revolving line of credit may be expanded by agreement of the parties from $600 million to up to $900 million if and to the extent the lenders revise their credit commitments to encompass a larger facility. The accordion feature may be added as a first-in, last-out term loan facility. The ABL Credit Agreement further provides the borrowers may request a European sub-credit facility under the revolving line of credit or under the accordion feature for borrowing by certain European subsidiaries of RH if certain conditions set out in the asset based credit facility are met. The maturity date of the asset based credit facility is July 29, 2026. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["54 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents We entered into a $2,000 million term debt financing in October 2021 (the “Term Loan B”) by means of a Term Loan Credit Agreement through RHI as the borrower, Bank of America, N.A. as administrative agent and collateral agent, and the various lenders party thereto (the “Term Loan Credit Agreement”). Term Loan B has a maturity date of October 20, 2028. As of February 3, 2024, we had $1,955 million outstanding under the Term Loan Credit Agreement. We are required to make quarterly principal payments of $5.0 million with respect to Term Loan B. In May 2022, we entered into an incremental term debt financing (the “Term Loan B-2”) in an aggregate principal amount equal to $500 million by means of an amendment to the Term Loan Credit Agreement with RHI as the borrower, Bank of America, N.A. as administrative agent and the various lenders parties thereto (the “Amended Term Loan Credit Agreement”). Term Loan B-2 has a maturity date of October 20, 2028. Term Loan B-2 constitutes a separate class from the existing Term Loan B under the Term Loan Credit Agreement. As of February 3, 2024, we had $494 million outstanding under the Amended Term Loan Credit Agreement. We are required to make quarterly principal payments of $1.3 million with respect to Term Loan B-2. Certain Transactions Related to Convertible Senior Notes In the first and second quarters of fiscal 2022, we entered into certain transactions in connection with the 2023 Notes and 2024 Notes. Warrant Termination Agreements In the first quarter of fiscal 2022, we entered into individual privately negotiated agreements with a limited number of sophisticated financial institutions (collectively, the “Counterparties”) to repurchase all of the warrants previously issued in connection with the 2023 Notes and 2024 Notes. Upon closing of these transactions, we paid an aggregate of $391 million in cash to terminate warrants representing 3,385,580 shares of our common stock. Convertible Bond Hedge Unwind Transactions In the first quarter of fiscal 2022, we entered into individual privately negotiated agreements with the Counterparties to terminate all of the remaining convertible note bond hedges previously entered into in connection with the 2023 Notes and 2024 Notes. Upon closing of these transactions, we received an aggregate of $232 million in cash for the termination of the bond hedges. Convertible Senior Notes Repurchases In the first and second quarters of fiscal 2022, we entered into individual privately negotiated transactions with certain holders of the 2023 Notes and 2024 Notes to repurchase $237 million in aggregate principal amount of the convertible senior notes representing $63 million and $174 million in principal amount of 2023 Notes and 2024 Notes, respectively. Upon closing of these transactions, we paid an aggregate of $396 million in cash to repurchase such convertible senior notes. Result of the Convertible Notes Transactions In aggregate, we expended a net total amount of approximately $563 million in cash (inclusive of expenses) in the first half of fiscal 2022 to complete the above transactions. As a result of the bond hedge termination agreements, all convertible note hedges entered into in connection with the issuance of the 2023 Notes and 2024 Notes were terminated in fiscal 2022, including convertible note hedges with respect to any 2023 Notes and 2024 Notes that remained outstanding. As a result of the warrant termination agreements, all warrants entered into in connection with the issuance of the 2023 Notes and 2024 Notes were terminated in fiscal 2022, including warrants with respect to any 2023 Notes and 2024 Notes that remained outstanding. As of February 3, 2024, we had $42 million remaining in aggregate principal amount of the 2024 Notes, which have a scheduled maturity in September 2024. We anticipate having sufficient cash available to repay the principal amount of the 2024 Notes in cash with respect to any convertible notes for which the holders elect early conversion (if applicable), as well as upon maturity of the 2024 Notes in September 2024. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 55"]] [[/GREPCENT_TABLE]] ​ Table of Contents Capital We have invested significant capital expenditures in developing and opening new Design Galleries, and these capital expenditures have increased in the past, and may continue to increase in future periods, as we open additional Design Galleries, which may require us to undertake upgrades to historical buildings or construction of new buildings. Our adjusted capital expenditures include capital expenditures from investing activities and cash outflows of capital related to construction activities to design and build landlord-owned leased assets, net of tenant allowances received during the construction period. During fiscal 2023, adjusted capital expenditures were $295 million in aggregate, net of cash received related to landlord tenant allowances of $2.5 million. In addition, we also received landlord tenant allowances under finance leases subsequent to lease commencement of $2.4 million, which are reflected as a reduction to principal payments under finance leases within financing activities on the consolidated statements of cash flows. We anticipate our adjusted capital expenditures to be $250 million to $300 million in fiscal 2024, primarily related to our growth and expansion, including construction of new Design Galleries and infrastructure investments. Nevertheless, we may elect to pursue additional capital expenditures beyond those that are anticipated during any given fiscal period inasmuch as our strategy is to be opportunistic with respect to our investments and we may choose to pursue certain capital transactions based on the availability and timing of unique opportunities. There are a number of macroeconomic factors and uncertainties affecting the overall business climate as well as our business, including increased inflation and higher interest rates and we may make adjustments to our allocation of capital in fiscal 2024 or beyond in response to these changing or other circumstances. We may also invest in other uses of our liquidity such as share repurchases, acquisitions and growth initiatives, including through joint ventures and real estate investments. Certain lease arrangements require the landlord to fund a portion of the construction related costs through payments directly to us. As we develop new Galleries, as well as other potential strategic initiatives in the future like our integrated hospitality experience, we are exploring other models for our real estate activities, which include different terms and conditions for real estate transactions. These transactions may involve longer lease terms or further purchases of, or joint ventures or other forms of equity ownership in, real estate interests associated with new sites and buildings that we wish to develop for new Gallery locations or other aspects of our business. These approaches might require different levels of capital investment on our part than a traditional store lease with a landlord. We have also begun executing changes in our real estate strategy to transition some projects from a leasing model to a development model, where we buy and develop real estate for our Design Galleries either directly or through joint ventures and other structures with the ultimate objective of (i) recouping a majority of the investment through a sale-leaseback arrangement and (ii) resulting in lower capital investment and lower rent. For example, we have entered into arrangements with a third-party development partner to develop real estate for future RH Design Galleries. In the event that such capital and other expenditures require us to pursue additional funding sources, we can provide no assurance that we will be successful in securing additional funding on attractive terms or at all. In addition, our capital needs and uses of capital may change in the future due to changes in our business or new opportunities that we may pursue. Cash Flow Analysis A summary of operating, investing, and financing activities is set forth in the following table: [[GREPCENT_TABLE]] [["\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b","\u200b"],["\u200b","\u200b","YEAR ENDED"],["\u200b","\u200b","FEBRUARY 3,","\u200b","JANUARY 28,","\u200b","JANUARY 29,"],["\u200b","","2024","","2023","","2022"],["\u200b","\u200b","(in thousands)"],["Net cash provided by operating activities","\u200b","$","202,214","\u200b","$","403,687","\u200b","$","662,114"],["Net cash used in investing activities","\u200b","","(307,431)","\u200b","","(171,068)","\u200b","","(194,353)"],["Net cash provided by (used in) financing activities","\u200b","","(1,283,031)","\u200b","","(902,477)","\u200b","","1,607,127"],["Net increase (decrease) in cash and cash equivalents, restricted cash and restricted cash equivalents","\u200b","","(1,388,075)","\u200b","","(670,101)","\u200b","","2,074,793"],["Cash and cash equivalents, restricted cash and restricted cash equivalents at end of period","\u200b","","123,688","\u200b","","1,511,763","\u200b","","2,181,864"]] [[/GREPCENT_TABLE]] ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["56 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Net Cash Provided by Operating Activities Operating activities consist primarily of net income adjusted for non-cash items, including depreciation and amortization, impairments, stock-based compensation, loss on extinguishment of debt, cash paid attributable to accretion of debt discount upon settlement of debt (prior to the adoption of ASU 2020-06 in fiscal 2022) and the effect of changes in working capital and other activities. For fiscal 2023, net cash provided by operating activities was $202 million and consisted of net income of $128 million and an increase in non-cash items of $331 million, partially offset by a change in working capital and other activities of $257 million. The use of cash from working capital was primarily driven by a decrease in operating lease liabilities of $96 million primarily due to payments made under the related lease agreements, an increase in prepaid expense and other assets of $66 million, a decrease in deferred revenue and customer deposits of $43 million, a decrease in accounts payable and accrued expenses of $41 million, a decrease in other non-current obligations of $31 million and an increase in landlord assets under construction, net of tenant allowances, of $25 million. These uses of cash from working capital were partially offset by a decrease in merchandise inventory of $47 million. Net Cash Used in Investing Activities Investing activities consist primarily of investments in capital expenditures related to investments in retail stores, information technology and systems infrastructure, as well as supply chain investments. Investing activities also include our strategic investments. For fiscal 2023, net cash used in investing activities was $307 million and was comprised of investments in retail stores, information technology and systems infrastructure of $269 million and additional contributions to our equity method investments of $38 million. Net Cash Used in Financing Activities Financing activities consist primarily of borrowings and repayments related to convertible senior notes, credit facilities and other financing arrangements, and cash used in connection with such financing activities include investments in our share repurchase program, repayment of indebtedness, including principal payments under finance lease agreements and other equity related transactions. For fiscal 2023, net cash used in financing activities was $1,283 million, primarily due to the repurchase of 3,887,965 shares of our common stock for an aggregate repurchase amount of $1,249 million, payments on term loans of $25 million, net payments under finance lease agreements of $14 million and repayments of the 2023 Notes of $1.7 million and equipment notes of $1.2 million. In addition, we paid $3.7 million of excise taxes related to share repurchases made in fiscal 2022. These cash outflows were partially offset by proceeds from option exercises of $12 million. Non-Cash Transactions Non-cash transactions consist of non-cash additions of property and equipment and landlord assets and reclassification of assets from landlord assets under construction to finance lease right-of-use assets. In addition, non-cash transactions consist of excise tax from share repurchases included in accounts payable and accrued expenses at period-end, the extinguishment of convertible senior notes related to our repurchase obligations and associated financing liabilities and embedded derivatives arising from the convertible senior notes repurchase (refer to Note 11—Convertible Senior Notes in our consolidated financial statements), as well as shares issued and received related to convertible senior note transactions. Non-cash transactions also include the recognition of lease right-of-use assets obtained in exchange for lease liabilities, net of lease terminations, and the reclassification of finance lease right-of use assets and lease liabilities to property and equipment upon purchase of the underlying asset. Refer to Note 10—Leases. Cash Requirements from Contractual Obligations Leases We lease nearly all of our retail and outlet locations, corporate headquarters, distribution centers and home delivery center locations, as well as other storage and office space. Refer to “Leases” within Note 3— Significant Accounting Policies and Note 10—Leases in our consolidated financial statements for further information on our lease arrangements, including the maturities of our operating and finance lease liabilities. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 57"]] [[/GREPCENT_TABLE]] ​ Table of Contents Most lease arrangements provide us with the option to renew the leases at defined terms. The table presenting the maturities of our lease liabilities included in Note 10—Leases in our consolidated financial statements includes future obligations for renewal options that are reasonably certain to be exercised and are included in the measurement of the lease liability. Amounts presented therein do not include future lease payments under leases that have not commenced or estimated contingent rent due under operating and finance leases. Convertible Senior Notes Refer to Note 11—Convertible Senior Notes in our consolidated financial statements for further information on the 2023 Notes and 2024 Notes. The 2023 Notes matured in June 2023. Asset Based Credit Facility Refer to Note 12—Credit Facilities in our consolidated financial statements for further information on our asset based credit facility, including the amount available for borrowing under the revolving line of credit, net of outstanding letters of credit. Term Loan Refer to Note 12—Credit Facilities in our consolidated financial statements for further information on our Term Loan. Real Estate Loans Refer to Note 7—Variable Interest Entities in our consolidated financial statements for further information on the real estate loans held as part of our joint ventures with a third-party development partner. Share Repurchase Program and Share Retirement We regularly review share repurchase activity and consider various factors in determining whether and when to execute investments in connection with our share repurchase program, including, among others, current cash needs, capacity for leverage, cost of borrowings, results of operations and the market price of our common stock. We believe that our share repurchase program will continue to be an excellent allocation of capital for the long-term benefit of our shareholders. We may undertake other repurchase programs in the future with respect to our securities. Beginning January 1, 2023, share repurchases under our Share Repurchase Program (as defined below) are subject to a 1% excise tax imposed under the Inflation Reduction Act, H.R 5376. Share Repurchase Program In 2018, our Board of Directors authorized a share repurchase program through open market purchases, privately negotiated transactions or other means, including through Rule 10b-18 open market repurchases, Rule 10b5-1 trading plans or through the use of other techniques such as the acquisition of other equity linked instruments, accelerated share repurchases, including through privately negotiated arrangements in which a portion of the share repurchase program is committed in advance through a financial intermediary and/or in transactions involving hedging or derivatives. On June 2, 2022, the Board of Directors authorized an additional $2.0 billion for the purchase of shares of our outstanding common stock, which increased the total authorized size of the share repurchase program to $2,450 million (the “Share Repurchase Program”). In fiscal 2023, we repurchased 3,887,965 shares of our common stock under the Share Repurchase Program at an average price of $321.28 per share, for an aggregate repurchase amount of $1,261 million, inclusive of $12 million of excise taxes. As of February 3, 2024, $201 million remains available for future share repurchases under the Share Repurchase Program. Share Retirement In fiscal 2023, we retired 3,887,965 shares of common stock related to shares we repurchased under the Share Repurchase Program. As a result of this retirement, we reclassified a total of $10 million and $1,251 million from treasury stock to additional paid-in capital and retained earnings (accumulated deficit), respectively, on the consolidated balance sheets and consolidated statements of stockholders’ equity (deficit) as of and for the year ended February 3, 2024. Other Commitments We enter into various commitments related to the procurement of merchandise inventory. As of February 3, 2024, these merchandise inventory purchase commitments were $465 million. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["58 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents We are not able to reasonably estimate when cash payments for the unrecognized tax benefits associated with uncertain tax positions of $3.6 million as of February 3, 2024 will occur or the amount by which the liability for uncertain tax positions will increase or decrease over time. Refer to Note 14—Income Taxes in our consolidated financial statements for further information on our uncertain tax positions. Critical Accounting Policies and Estimates The preparation of financial statements in accordance with accounting principles generally accepted in the United States requires our senior leadership to make estimates and assumptions that affect amounts reported in our consolidated financial statements and related notes, as well as the related disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. We evaluate our accounting policies, estimates, and judgments on an on-going basis. We base our estimates and judgments on historical experience and various other factors that are believed to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions and conditions and such differences could be material to the consolidated financial statements. Information on all of our significant accounting policies can be found in Note 3—Significant Accounting Policies in our audited consolidated financial statements. Our senior leadership team evaluates the development and selection of our critical accounting policies and estimates and believes that certain of our significant accounting policies involve a higher degree of judgment or complexity and are most significant to reporting our consolidated results of operations and financial position, and are therefore discussed as critical. The following critical accounting policies reflect the significant estimates and judgments used in the preparation of our consolidated financial statements. Merchandise Inventories—Reserves Our merchandise inventories are comprised of finished goods and are carried at the lower of cost or net realizable value, with cost determined on a weighted-average cost method and net realizable value adjusted periodically for current market conditions. Net realizable value requires judgments that may significantly affect the ending inventory valuation, as well as gross margin. We adjust our inventory reserves for net realizable value and obsolescence (including excess and slow-moving inventory) based on current and anticipated demand trends, merchandise aging reports, specific product identification, estimates of future retail sales prices and historical results. We have not made any material changes to our assumptions included in the calculations of the lower of cost or net realizable value reserves during the periods presented. Lease Accounting Reasonably Certain Lease Term In recognizing the lease right-of-use assets and lease liabilities, we utilize the lease term for which we are reasonably certain to use the underlying asset, including consideration of options to extend or terminate the lease. At lease commencement, we evaluate whether we are reasonably certain to exercise available options based on consideration of a variety of economic factors and the circumstances related to the leased asset. Factors considered include, but are not limited to, (i) the contractual terms compared to estimated market rates, (ii) the uniqueness or importance of the asset or its location, (iii) the potential costs of obtaining an alternative asset, (iv) the potential costs of relocating or ceasing use of the asset, including the consideration of leasehold improvements and other invested capital, and (v) any potential tax consequences. The determination of the reasonably certain lease term affects the inclusion of rental payments utilized in the incremental borrowing rate calculations, the results of the lease classification test, and our consideration of certain assets held for sale or planned for sale-leaseback. The reasonably certain lease term may materially impact our financial position related to certain Design Galleries or distribution center facilities which typically have greater lease payments. Although the above factors are considered in our analysis, the assessment involves subjectivity considering our strategy, expected future events and market conditions. While we believe our estimates and judgments in determining the lease term are reasonable, future events may occur which may require us to reassess this determination. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["PART II","FORM 10-K | 59"]] [[/GREPCENT_TABLE]] ​ Table of Contents Incremental Borrowing Rate As most of our leases do not include an implicit interest rate, we determine the discount rate for each lease based upon the incremental borrowing rate (“IBR”) in order to calculate the present value of the lease liability at the commencement date. The IBR is computed as the rate of interest that we would have to pay to borrow on a collateralized basis over a similar term an amount equal to the total lease payments in a similar economic environment. We utilize our outstanding debt facilities, including our asset based credit facility or our Term Loan Credit Agreement, as the basis for determining the applicable IBR for each lease. We estimate the incremental borrowing rate for each lease primarily by reference to yield rates on debt issuances by companies of a similar credit rating, the weighted-average lease term and adjustments for differences between the yield rates and the actual term of the credit facility. In determining the yield rates, for newly constructed Design Galleries or significant distribution centers we utilize market information on the lease commencement date and, for all other leases, we utilize market information as of the beginning of the quarter in which the lease commenced. Fair Value We determine the fair value of the underlying asset, and the lease components such as land and building, for purposes of determining the lease classification and allocating our contractual rental payments to the lease components. The fair value of the underlying asset and lease components also impact our assets held for sale and sale-leaseback transactions. The fair value assessments may materially impact our financial position related to certain Design Galleries or distribution center facilities which typically have greater fair values. The determination of fair value requires subjectivity and estimates, including the use of multiple valuation techniques and uncertain inputs, such as market price per square foot and assumed capitalization rates or the replacement cost of the assets, where applicable. Where real estate valuation expertise is required we obtain independent third-party appraisals to determine the fair value of the underlying asset and lease components. Stock-Based Compensation—Performance-Based Awards For awards with performance-based criteria, compensation expense is recognized on an accelerated basis over the requisite service period. The fair value of each performance-based option award granted is estimated on the date of grant using a Monte Carlo simulation option pricing model that requires the input of subjective assumptions regarding the future exercise behavior, expected volatility and a discount for illiquidity. We determined these assumptions based on consideration of (i) future exercise behavior based on the historical observed exercise pattern of the award recipient, (ii) expected volatility based on our historical observed common stock prices measured over the full trading history of our common stock and implied volatility based on 180-day average trading prices of our common stock and (iii) a discount for illiquidity estimated using the Finnerty method. Variable Interest Entities We occasionally make investments in privately-held limited liability companies in connection with real estate development initiatives. As described in our significant accounting policy, we evaluate whether that legal entity is within the scope of the variable interest entity (“VIE”) model and, if so, whether we are the primary beneficiary of the VIE. This determination includes an assessment of whether we have the power to direct the activities that most significantly impact economic performance of the VIE, which requires judgement and evaluation of numerous factors. These include the purpose of the VIE, rights and obligations of the variable interest holders, mechanisms for the resolution of disputes among the variable interest holders and other agreements with the legal entity and its variable interest holders. We consolidate a VIE if our involvement indicates that we are the primary beneficiary. We account for investments in VIEs where we are not the primary beneficiary using the equity method of accounting. In certain instances, we are required to recognize non-cash compensation expense related to equity interests given to the noncontrolling interest holder of consolidated VIEs in connection with real estate development initiatives. There are no explicit or implicit vesting conditions associated with these deemed compensation arrangements. Equity-classified compensation arrangements are measured upon the noncontrolling interest holders being admitted as a member of the VIEs, and liability-classified compensation arrangements are measured at the end of each reporting period. The fair-value-based measure of the equity interests is determined using a Black-Scholes option pricing model that requires the input of subjective assumptions regarding the future cash flows of the VIE, including consideration of future expected debt financing and the expected volatility of the equity interests. We determined these assumptions based on entity specific considerations of (i) the primary expected future cash flows of property rents and expected debt and debt service payments, (ii) discount rates appropriate for the economic environment and anticipated future interest rates and (iii) expected volatility based on historical observed stock prices of publicly traded peer companies, including those involved in real estate development. ​ [[GREPCENT_TABLE]] [["\u200b","\u200b"],["60 | FORM 10-K","PART II"]] [[/GREPCENT_TABLE]] ​ Table of Contents Recently Issued Accounting Pronouncements Refer to “Recently Issued Accounting Standards” within Note 3—Significant Accounting Policies in our consolidated financial statements within Part II of this Annual Report.